Big hopes for little miners

Investing in small-cap miners is risky business. But if you know where to look and follow a set of rules, you could just find yourself riding the next market darling mining stock all the way to the top. Getting in early certainly doesn’t guarantee success. In fact, many advisers warn against it.

One source notes that many sub-standard explorers with highly speculative mining tenements tend to tap the Australian Stock Exchange for funds. The adviser notes that a lot of West Perth-originated floats are undertaken on the back of poor quality tenements.

“They raise the minimum $3 million through an initial public offering with only moose-pasture and then they go and find another asset," the source said.

“Everyone knows the real intention is not to drill what they’ve got, but find something better once they’ve got a listed vehicle."

But not all small-cap miners should be overlooked as the junior end of the market is home to the most impressive returns in the sector, provided you’re ready to take the risk.

Sometimes the key is identifying the right commodity.

For example, coal juniors are becoming scarce in Australia and new quality coal listings have proved to deliver solid returns.

Coking coal spot prices have spiked about $US400 a tonne, while June quarter contract prices have been negotiated at about $US330 a tonne. Thermal coal spot prices climbed to $130 a tonne in recent weeks, up from about $126 last month.

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The booming commodity prices are a sign of demand-side shortages and can be an indicator of where to start with small-cap investments.

Of the coal juniors, two stand-out coking coal developers have delivered stellar returns since listing.

Carabella Resources
’ share price since listing at 40¢ late last year shows few signs of weakening. The share price has reached about $2.50, a return of more than 500 per cent for shareholders who participated in the December float.

The high-quality coking coal reserves and location near rail infrastructure has clearly impressed the market, along with the massive exploration target – half a billion tonnes of coking coal.

Bathurst Resources
, which boasts high-quality coking coal reserves on the west coast of New Zealand’s South Island, is another coal junior that has delivered.

Shares in Bathurst are up more than 60 per cent since January 2011 and more than 1600 per cent in the past 12 months.

Sometimes quality assets in little-known minerals provinces are overlooked and can return good value, as was the case with Mozambique coal developer
Riversdale Mining
.

Its share price doubled when mining giant Rio Tinto made a $3.9 billion grab for the explorer, sending its share price soaring.

Keeping informed on the demand and supply fundamentals of global commodity markets can also be a good way to pick winners among miners capitalised below $100 million.

“With everything in this industry, timing is absolutely everything,"
Venture Minerals
managing director
Hamish Halliday
said recently on a trip to Hong Kong.

Tin and tungsten developer Venture Minerals, which has a market cap of just $102 million, is riding a wave of sentiment in favour of tin and tungsten.

It plans to deliver first production from its Mount Lindsay project in north-west Tasmania in the second half of 2013.

Like rare earths, tungsten is used in an expanding range of industrial and electronic applications, and as with rare earths, key consumers are worried about China’s control of international supply.

Venture has modelled pre-feasibility studies at Mount Lindsay at $28,200 a tonne.

But the rapidly changing dynamics of world markets has put it in a good position to cash in on demand for tin and tungsten.

Tungsten prices did not falter in the aftermath of the Japanese earthquake and nuclear crisis and Venture is now looking at about $40,000 a tonne

“What that would do to the bottom line would be pretty impressive," Halliday says.

Fund managers are also keeping a watchful eye on emerging tungsten producer
Icon Resources
, which is set to begin tailings re-treatment at its Mount Carbine mine in 2011, followed by full production later in the year.

China, which controls more than 90 per cent of the global market, has dramatically cut rare earths export quotas to protect local supply and crack down on environmentally damaging and illegal mining.

China slashed its export quotas by 35 per cent for the first half of 2011, following a 72 per cent cut in the second half of 2010.

The export restrictions have sent rare earth prices soaring and forced customers to consider alternative sources of supply, creating huge opportunities for emerging producers like
Lynas
and
Alkane Resources
.

Lynas and Alkane are two Australian companies scrambling to develop projects that will provide new sources of rare earth minerals such as lanthanum and cerium outside China.

Base metals have also had a bull run in recent months, as have base metal juniors with solid assets.

Copper, for example, has had a bull run to about $US10,000 a tonne.

Sandfire Resources
was once known as a penny dreadful investment. But Sandfire announced a sizeable copper-gold discovery at its Doolgunna project, which is 900 kilometres north of Perth, in early 2009.

The find, as well as favourable fundamentals in the copper market, sent the sharemarket darling’s share price rocketing by 121.8 per cent during 2010.

The Sandfire story shows it pays to keep an eye on demand and supply of key commodities to pick a winner in the smaller end of town.

However, shooting for the stars with little known penny stocks can backfire.

An initial public offering boom can signal an overheating market and experts warn that chasing stock in unproved listed companies in a hot float market is dangerous.

Quality floats when the market is relatively quiet can perform just as well in the long term if the company’s individual assets, commodity class and management have the right attributes.

A solid management team can be a sign of good things to come provided they deliver what they say they will. One fund manager says solid management accounts for up to 30 per cent of the decision to invest in a company.

Junior explorers with a strong focus on growth should have qualified and experienced geologists, while developing companies need mine engineering and development experience.